Some Steps of the Financial and Economic Crisis of 2008

The subprime mortgage crisis would get much worse
Despite all the talk of subprime being contained, my report “The Subprime Crisis is Just Starting” was published in March of 2008, a full six months before it started hitting the fan.

Major financial firms would fail
In May of 2008 I wrote “A Credit Derivatives Risk Primer”, which detailed how the same fundamental, predictable types of human-behavior-based mistakes that crashed the $1.2 trillion mortgage derivatives market would imperil the $62 trillion credit derivatives market, and lead to losses that the major financial firms could not possible handle.

Failures would continue, in a dominoes-like fashion
As explained in the Subprime Crisis report, these intertwined derivatives crises were the result of years of extraordinarily bad judgments on the part of the major financial firms, and carried the real danger of causing the rapid, domino-like annihilation of the highly leveraged and intertwined Wall Street firms in a flash, not from accounting losses, but from losing their sources of funding once creditors understood the extent of the derivatives losses.

A total meltdown would not happen
Both reports explained that, while investors should consider getting immediately out of financial assets to avoid the rush for the exits, they should not invest for a total market meltdown of the financial system, because it would not be permitted to happen.

A massive Government bailout would happen
Instead, both reports state that what you should anticipate is a massive government intervention to protect the financial system, and that the best strategy was to avoid the financial asset losses while positioning yourself to benefit from the bailouts.

Inflation is coming
The Federal Reserve and Government had already proven they would not hesitate to create a near infinite supply of new money out of thin air, without raising taxes or increasing economic output, and thereby create extraordinary inflationary pressures within the system. While deemed necessary to combat global asset deflation, you should expect this monetary inflation to show up as price inflation on real goods in the not too distant future.

Global Economic Crisis & Financial Crisis

The root cause of the economic and financial crisis was the United States mortgage market selling sub-prime mortgages to large numbers of consumers with inadequate incomes. These mortgages were bundled into securitized paper investments, and sold by Wall Street to major financial institutions across the globe.

When the mortgages became non-performing, these securitized assets were transformed into toxic acid, infecting the entire worldwide financial system. The ensuing global economic and financial crisis has destroyed trust in banks and borrowers in all the major economies of the world. Depositors are withdrawing their money from uninsured and even insured accounts. Coinciding with this massive run on the world’s banks, these financial institutions are no longer lending capital to each other, reflected in the rising LIBOR short term inter-bank loan rates.

Capital is fleeing, and the global credit crunch ensuing has frozen the arteries of a global economy based on easy, cheap credit. As corporations are being denied normal flows of credit, a massive global economic crisis is transforming the financial meltdown on Wall Street into an economic disaster on Main Street. This evolving global and financial crisis and credit crunch will afflict developed and developing economies, leading to massive unemployment, demand destruction and price deflation among many pivotal asset classes

The attempts by the Federal Reserve Bank and Treasury Department in the United States to inject liquidity into the credit market, along with intervention by central banks in many other developed economies, is proving ineffective in responding to the global economic crisis. A growing number of economists are speculating that the global economic crisis will lead to a worldwide recession of such intensity; it may rival the Great Depression of the 1930’s in its calamitous economic devastation.